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​and it's hungry for seconds.

Lately, there's been a flurry of activity from federal and state agencies targeting cryptocurrency exchanges lately. Exchanges have been the predicted "next target" by professionals in the industry that I've talked to ever since the Securities and Exchange Commission ("SEC") started sending letters related to initial coin offerings ("ICOs").

For example, New York sent a barrage of letters in April to crypto exchanges, probing for more information. Similar to the SEC's letters to investment funds, NY's letters seem to be aimed at educating regulators for the time being, rather than any type of actual enforcement or regulation. This makes sense; you can't regulate what you don't understand.

But since digital asset exchanges are likely to only grow bigger and bigger (like how NASDAQ could add a crypto exchange soon) it's inevitable that regulators will start taking enforcement actions and actively regulating these exchanges with increasing frequency and intensity. But, as the crypto regulation refrain goes, this is OK because it's a crucial step in the growth, stability, and credibility of the crypto industry.

Exchanges must be registered with the SEC or qualify for an exemption.

The most feasible exemption for crypto exchanges is the Regulation Alternative Trading System ("Reg ATS"). Reg ATS is the more likely option for crypto exchanges, since full registration with the SEC is extensive, and associated more with public stock exchanges like NYSE and NASDAQ.

ATS exchanges don't need to fully register with the SEC. They must register as broker-dealers and make some initial filings and give some forms of notice to the SEC. But overall, they're more lightly regulated than fully registered exchanges.

The SEC issued a release in March 2018 expressing concern over the fact that, currently, no crypto exchanges are registered or have qualified for the ATS exemption. Oops. Coinbase is leading the charge to be the first ATS, though.

Internal Revenue Service ("IRS")

The IRS has already imposed (some) user reporting requirements on crypto exchanges like Coinbase. How extensive their reporting and disclosure requirements will end up being are up for debate, given Coinbase successfully pushed back and limited the IRS request.

FinCEN

In 2013, FinCEN released a report on "virtual currencies". In this report, the agency determined that crypto exchanges must register as "money service businesses" ('MSBs"). One sub-type of MSB is a money transmitter, which you can read about more here, and is one of the main ways many crypto-related businesses are currently facing regulation. Any crypto exchange that has custody of users' cryptocurrencies will be regulated as an MSB, meaning it must register with FinCEN, collect certain information on its users, and have certain compliance policies in place.

AML/KYC

The Bank Secrecy Act ("BSA") imposes anti-money laundering ("AML") and know-your-customer ("KYC") requirements on exchanges. Many exchanges are currently self-imposing these requirements (think about that driver's license you had to upload when registering on Kraken). Generally, these requirements are aimed at identifying who actually owns assets and accounts, in order to minimize money laundering and/or other illegal behavior.

Anti-Fraud

The SEC may also target exchanges with anti-fraud tools. For example, this may include targeting exchanges that seem to be manipulating prices themselves.

State Regulations

And, of course, in addition to the above regulations, each state may impose its own regulations on exchanges that operate in-state. ​

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